A once thriving, globally acclaimed business says it faces an expensive death, wedged between punitive commercial law and government inaction.

Most New Zealanders will have never heard of it, but if you were a young international traveller it was the place to be – the first stop and bustling home base for thousands of tourists embarking on journeys throughout New Zealand. Perched at the top of the Elliot Stables building in central Auckland, it was voted by Hostelworld as the city’s most popular backpackers four years in a row and the third most popular backpackers in the world in 2019. With every one of its 100 beds booked solidly for months on end, it was a lucrative and valuable business, fully capable of affording its hefty $360,000-a-year lease.

Today The Attic Backpackers is quiet. Most of its beds are bare. A full team of three staff attend to a handful of guests: mostly idle stragglers awaiting visas or their flights home. “No events scheduled” is written on the chalkboard by the reception area, and the large communal kitchen is empty except for a solitary guest making pasta. Emptiness and silence are not features you’d equate with a youth backpackers. But they’ve become the common symptoms of the withering atrophy that has beset many New Zealand tourism businesses since Covid-19 emerged.

For businesses like The Attic, clinging to life on the fringes of an empty market, the most logical decision would be to close down and walk away. Michael LeRoy-Dyson wishes it were that simple. The owner and founder of The Attic, he knows there’s no chance his business will recover its former trade before he goes broke. The borders are closed, the tourists aren’t coming back and he’s losing $45,000 a month operating the place at around 20% occupancy. He’s ready to cut his losses and leave. And he would, were it not for a personal guarantee on the lease that means if he does he could lose everything he owns.

“Here’s how a personal guarantee works,” he explains. “If I go broke and step out of my lease, he’s [the landlord] got a legal requirement to mitigate his loss. And I am liable for any of the costs that he can’t mitigate.

“My only chance under my current lease is for him to agree to let me out, and he’s already been clear that he’ll take my personal guarantee. In December I go broke, and at that point my house sells and we start spending that money or he comes and takes it.”

Imminent bankruptcy is a stressful prospect for even the most stoic proprietor to contemplate. And while it’s certainly played on LeRoy-Dyson’s nerves – and sleep – over the past few months, he’s not what you’d call aggrieved. In fact he seems pragmatic, almost philosophical.

We speak in the The Attic’s communal lounge area, which, like the rest of the place, is empty. He tells me he has no qualms with his landlord, The Icon Group, which owns the entire building that houses Elliot Stables and Tony’s Steakhouse along with St Kevin’s Arcade on Karangahape Road. It’s business, after all, and he’s signed an agreement that makes him liable for almost $2m worth of rent over the next five years of his lease. What he takes issue with is the systemic power imbalance between tenant and landlord that has become truly untenable in the current crises.

“We’ve had business problems before. But they’ve all been compounded by the Covid response and the fact that it’s shined a light on the inequities that really make it impossible for a business to succeed.”

Arbitration

Enmeshed in the intricacies of commercial law, LeRoy-Dyson’s predicament is a complex one. While many businesses are struggling to pay their rent in the post-Covid economy, most would be satisfied if they could negotiate a rent reduction or holiday with their landlord until things improve. Many landlords have been obliging, while others have been less so.

To provide a solution, the government had moved to intervene in June and temporarily change the Property Law Act to force landlords into arbitration if they weren’t helping their tenants. The amendment bill was subsequently blocked by New Zealand First, which argued that it violated the sanctity of commercial contracts, and imperilled some smaller landlords to the demands of their giant tenants.

Foiled, the government has instead put aside $40m to subsidise voluntary arbitration, although critics either doubt it would do much good, or say it’s too little too late.

For LeRoy-Dyson, however, pursuing arbitration to negotiate rent relief is not even on the table; the reduction would have to be over 80% to make the business viable, and no landlord in their right mind would agree to such an arrangement.

“I would argue that in many situations it might help but in others it wouldn’t help at all,” he says. “And I don’t think it would be of any help in my situation.

“Our cashflow projections are that if we’re at a 50% reduction, we’ll be something like $200,000 in debt by Christmas, with no real way to rebuild or repay that, so yeah, things are pretty desperate.”

After receiving a 50% rent reduction in the first month of lockdown, he says he’s had to argue with the landlord every month since to negotiate a rent he can afford under The Attic’s reduced occupancy and revenue.

So with no chance of the business recovering, and a rent reduction pretty much useless, can’t he reach some sort of resolution with The Icon Group? He says the personal guarantee is a disincentive for his landlord to negotiate.

“I email them and say we need to meet to talk about a long-term solution because we have no indication that things are going to get any better, and we get no reply. Just radio silence.

“It’s all underpinned by a personal guarantee, which is a standard clause in many leases… but of course I don’t think that clause was put in leases in anticipation of what’s hit us now.”

Pressuring the government

The Icon Group did not respond to The Spinoff’s request for comment, but the company was covered in a New Zealand Herald story in May about the plight of the Elliot Stables’ eateries, whose owners claimed they were receiving little support from their landlord and were on the verge of collapse. The Icon Group responded to the story, saying it had provided $675,000 worth of rent relief, although the tenants said they had seen little of it.

The Elliot Stables business owners, who say they are still suffering from crippled trade and high rents, have begun working with LeRoy-Dyson to form some sort of collective bargaining group. With enough desperate voices, they hope they can still pressure the government to intervene and make changes to the Property Law Act to reflect the extenuating circumstances of Covid-19.

They’ve submitted a document with their main requests to minister of courts Andrew Little, the main one being a temporary hold on personal guarantees to allow the owners of doomed businesses to walk away in the event of a global pandemic – similar to legislation recently introduced in Australia.

However, Andrew Little told The Spinoff the ship had sailed; there was little chance of other legislative changes passing the scrutiny of New Zealand First.

“Any further changes would require legislation, and we do not have the numbers in the House to progress that,” he said.

“While we watched what Australia has done in this space closely, we were unable to progress anything without making changes to the Property Law Act – which we are unable to do without New Zealand First’s support.”

Green MP and Auckland Central candidate Chlöe Swarbrick, who has advocated for these businesses, agreed that the changes were necessary, but it was a matter of political willpower.

“The solution for these small businesses is commonsense law changes that enable effective and fair dispute resolution. Without that, you end up in a David and Goliath stand-off,” she told The Spinoff.

“Time and again, politics has delayed that critical legal infrastructure to negotiate perceived impasses where personal guarantees are held over the head of owner-operators that have been confronted with the much-talked about ‘unprecedented times.’”

It’s a democratic function of a coalition government. But for LeRoy-Dyson, it means that his business has slipped through the cracks and is slowly bleeding to death.

Attempts to pivot

But shouldn’t it be incumbent on a struggling business to adapt for survival? After all, the Covid-19 era has produced many miraculous stories of foundering businesses turning around their troubles and flourishing through a combination of versatility and nous.

“We’ve tried very hard to make it work,” LeRoy-Dyson says. “We’ve looked at accommodation for construction workers, for tertiary students, isolation, domestic tourism – there’s just nothing.”

He says every pivot option he’s pursued has reached the same dead end; none of it would bring in enough revenue to meet the rent, which is still based on the time when the business was a thriving international destination.

The most viable and beneficial solution was converting the space into emergency or transitional housing for rough sleepers or others in need. It’s something LeRoy-Dyson is passionate about, and he’s estimated it would require far less state funding than the current regime of putting people up in motel rooms.

He concedes it would take some planning, and several onsite staff to manage the residents. Otherwise, he says, it wouldn’t take much to make his 100 beds available to those desperate for accommodation.

“There’s no reason why it couldn’t be successful,” he says. “Yes you might have some problems, but we would have social workers and we know that some people would really benefit. Why not just try it? Let’s just put 20 people in and see how it goes for six months.”

After several calls to the Ministry of Housing and Urban Development (HUD), Auckland City Mission and Lifewise, he was told it wasn’t possible – backpackers weren’t appropriate for transitional housing, as the facilities must not be communal.

Both Lifewise and HUD confirmed to The Spinoff that although there was a need for emergency housing, backpackers weren’t likely to be considered.

“It is not a viable option for us because it has shared facilities. We only look at self-sufficient units,” said Aditya Kundalkar from Lifewise.

The luck of the draw

More dead-ends, more frustration. They’ve become all too familiar to LeRoy-Dyson on his fruitless quest to sustain the business and walk away with the shirt on his back. Now it’s a case of languishing away the days in a dead market and watching as other local backpackers – Nomads, The Fat Camel, BK Hostel – all close down or sell up. He says it’s only a matter of time before the landlord comes knocking to recoup the shortfall in rent over the past few months.

“What I suspect they’re waiting for is 30-day arrears to hit me with an eviction notice.”

Sitting in The Attic’s empty lounge with the unplayed guitars and boardgames, he scoffs at the irony of the national rhetoric that reveres small businesses – the backbone of New Zealand – when his has so easily fallen into the shadows.

“I believe there are a few businesses who, for no fault of their own, have just been strangled,” he says.

“And I’m up for the fact that it’s the luck of the draw, but I don’t think that I should lose everything that I’ve ever worked for in the last 35 years because of that.”